Archive - Apr 7, 2011 - Story

Flashing headline that Congress has passed the stopgap budget measure. This is not a surprise. What will be a surprise is if the measure first passes the Senate (and they better move quick: 26 hours or so left), and then Obama has to not veto it. Which he has said he will. In other words this is a major non-event for the time being.

Adrian Douglas submits: The latest LBMA clearing statistics (Feb 2011) reveal that the LBMA bullion bank members traded a total average net daily gold volume of 18.1 million ounces with a value of $24.8 billion. Some analysts have in the past estimated that the gross volume is likely to be 3-4 times the net volume giving potentially over 70 million ounces of gross gold trading worth 100 billion dollars. This would be equivalent to trading all the gold that is mined in world each year each and every day! Clearly the majority of this trading is unbacked by physical gold. The bullion banks only make a ledger entry for gold sold or bought and as long as the client never asks for delivery the bank never has to have the gold. I have through my studies indicated that probably 45 ounces of gold have been sold for each one that exists. The bullion banking business is very opaque but it struck me that if the members of the LBMA are collectively trading a net value of $6.2 trillion annually this should be laid out and explained in the bullion banks annual reports. In analyzing the Annual reports of the major bullion banks I made some astonishing discoveries. For most of these banks their bullion banking business is entirely hidden from the accounting. In the text there is almost no mention of gold, silver, bullion, or precious metals. In fact it is impossible to know that these banks are even in the bullion banking business let alone know anything about their trades, assets and liabilities. The only exception is Scotia Mocatta (see below). The bullion banking business is completely obscured from view in the annual reports. We know from our discussion that there should be revenues of $1.2 trillion annually be reported which would make the activity the largest activity in any of the banks, yet instead it is entirely missing! How could such trading and references to it be almost entirely absent from these reports?

Just to make the clusterflock complete the following news from BBC Newsfile crosses the tape: "The Ma'an News Agency website in Arabic at 1631 gmt on 7 April posts the following "urgent" caption: "[Ofir] Gendelman [spokesman for the office of Israeli Prime Minister Binyamin Netanyahu] Tells Ma'an: I do not rule out the possibility that Israel will wage war on Gaza tonight." Or, more metaphorically, the proverbial flame in a fireworks store. Surely this last straw will send the S&P limit [up|down] until someone has the brilliant idea that Bernanke can print his way out of that one as well.

When it comes to following the trail of money, capital flows specialist TrimTabs has traditionally focused on the stock market. In the past, TrimTabs' Charles Biderman has discussed how according to any reasonable calculations, there appears to be a key buyer missing among the usual market participant suspects, leading Biderman to conclude that the Fed may be buying stocks directly (or indirectly through Citadel as the case may be). To our surprise, in its most recent release, TrimTabs takes a look at the buyers in the gold market, and ends up with the same question: "Gold prices hit a record high in nominal terms for the second consecutive day.  We are not sure who is driving up prices." The speculative conclusion: "Are central bankers loading up on gold as they crank up the printing presses and keep interest rates ridiculously low?" Of course, at first glance this would be preposterous as it has long been accepted that for the Fed a jump in surge prices is a very adverse development. Well, is it? Traditionally rising gold prices have been merely indicative of abnormally high inflation, which for the Fed was a "bad" thing in the past. Not so much any more, or at least since the advent of the "wealth effect" experiment. Recall that it is now the Fed's "goal" to give the impression of inflation (and reality for those who eat and use energy). This is based on Bernanke's false assumption that inflation is much more easily controllable (15 minutes...) than deflation. So while on the surface this may appear to be a preposterous claim, in reality there is nothing that prohibits a gold price surge in the context of the Fed's third mandate.

With the market now only capable of kneejerk headline reactions which end up being immediately priced in, in the pursuit of the mythical Russell 36,000, it completely ignores the actually important news (whose interpretation has not been programmed into the algos trading the S&P) such as input costs and their derivatives, which will inevitably crush margins and lead to the same market reaction as that seen in the summer-fall 2008 transition. And since leverage on all cash flow producing assets will be at the same level as US banks circa 2008, the result will be an even worse wipe out. It has gotten so bad that US Energy Secretary Steven Chu was dragged out of his office to present his version of the "irrational exuberance" speech so pervasively ignored by the stock market until it was proven to be the only sensible thing ever uttered by the maestro. At a news conference on clean energy, Steven Chu said on Thursday high oil prices posed a threat to the global economy. "The oil producer countries and the oil consuming countries are concerned because it does have an impact on a very fragile economic recovery. There is great concern," Chu told a news conference while attending a clean energy conference. "There's ongoing discussions ... I'm not going to go into any of the details of the discussions. There is a concern about trying to stabilize prices. There is a concern about rising prices," he said." There may be a concern, but according to the president there isn't really much that can be done about said prices. The best people can do is learn to cope. Especially since there is no chance that the commodity complex will be declining any time soon: to many today's ECB decision was a potential catalyst. And instead the market took one look at the number, listen for 2 minutes to Trichet's rambling remarks and bid everything up.

While the last time there was a major market swing minutes before POMO completion force the Fed to delay the end of that particular POMO after Primary Dealers had to make sure they are going to be guaranteed their hundreds of millions in taxpayer funded capital gains, this time around there was no such issue. Today's monetization of 5 Year Notes closed with $6.580 billion of debt bought by Brian Sack in this week's last POMO (none tomorrow). And in what should not be a surprising development to anyone, the one issue which represented over half of the total operation was the just issued 5 Year QA1 which was placed literally a week ago (highlighted on the table). And so the grand scam continues: the Fed pretends not to be monetizing, the Primary Dealers pretend not to be making millions in preferential Bid terms, and taxpayers pretend to care.

More bad news for TEPCO. Just out from NHK: Two of three power systems out at TEPCO Onagawa plant. Hopefully this means the plant still has power. More as we see it.

ES just took a big leg lower. It is unclear if this is due to breaking news of a new 7.4 earthquake hitting Tokyo and a subsequent Tsunami alert. Then again, there may be no reason whatsoever: this is a self-aware SkyNet after all. Follow the latest developments on NHK here.

The picture for the ongoing operation of US government is looking bleaker by the day. According to The Hill, "Senate Majority Leader Harry Reid (D-Nev.) said that he'd grown pessimistic since last night's meeting at the White House about the chances to avoid a government shutdown. During a speech on the Senate floor, Reid said that in the hours since a meeting last night at the White House with President Obama and House Speaker John Boehner (R-Ohio), he'd grown less optimistic that a deal could be reached to avoid a shutdown. "I am not nearly as optimistic -- and that's an understatement -- as I was 11 hours ago," Reid said." And while the adverse effects of a government shutdown are appreciated by all, the good thing is that such a move will likely freeze the financial picture of the government at a snapshot of Friday's terms. This will be in advance of a week of heavy bond issuance, amount to over $70 billion. If one were to add $20-30 billion in refund issuance, the debt ceiling (and we mean the real deal - based on debt subject to the limit) which now has an $84 billion buffer until breach as of yesterday, could be busted as soon as next week. What better way to prevent that than to shut down the government completely.

If one scours the newspapers, maybe, just maybe, one may find reference, in the page 13 fine print, that gold prices keep hitting fresh all time highs each and every day. The rumor now is that petrodollars have had their fill of EURs (which they have been buying instead of USDs) and are migrating to PMs. Another catalyst is the earlier announcement by Jean-Claude Trichet that the rate hike may not be the first in a series, confirming the vacillation by the European Central Bank. Until we see confirmation we will let this rumor be. One thing we are certain of: there are more buyers than sellers.

Goldman's Natacha Valla has compiled this useful paraphrase of the Trichet press conference conference. In a surprising turn of events, the ECB head pulled a Greenspan and left many scratching their heads just what he means. We will take a quick stab at predicting the implications of today's rate hike: once the EFSF runs out of capital, or outright fails, the ECB will be back in loosening mode right fast.

Back in February we were wondering how long before Gadaffi starts a scorched earth policy on his own country, and primarily his oil infrastructure, in a repeat of Hussein's non-triumphal departure from Kuwait. Turns out the answer is about a month and a half. With it now becoming painfully clear that the whole purpose of the humanitarian intervention is to procure preferential terms of oil imports from Libya's rebel alliance, the "humanitarian" force has forgotten that despite no airplanes, Gaddafi will likely not take too kindly to not collecting revenues from what he perceives as his natural resources. From the FT: "Oil production in rebel-controlled eastern Libya has stopped after troops loyal to Muammer Gaddafi bombarded several oilfields, the opposition said on Wednesday. The assault came hours after the rebels exported their first cargo of oil into the international market, potentially opening the door to millions of dollars of funding to sustain their uprising against Colonel Gaddafi’s 41-year rule. The attack against oilfields in the east was the first against production facilities. Previously, only port facilities and crude oil storage tanks in the Es Sider and Ras Lanuf, also in the east, were damaged during the conflict." We are confident that this escalation will give NATO the caed blanche to commence a land-based campaign and prevent further infrastructure destruction before Gaddafi causes irreparable damage to even more facilities (although Halliburton naturally couldn't care less).

Following yesterday's bailout request by Portugal one would have expected that the Portuguese bond curve would tighten at least a little on some short covering in rates. One would be wrong. Except for a tiny tightening in the short-end (sub 1 Year), Portuguese rates have actually deteriorated across the curve with roughly a 0.075 widening in all points east of the 2Y. Is it time to pull an Ireland and start pricing in Portugal bailout #5?

No surprise in this number: last week's 388K was revised up to 392K, declining to 382K below expectations of 385K, which in tried BLS fashion will certainly be revised next week so that the actual number will have been a miss but by then nobody will care. Continuing claims were higher than expected at 3,723K on expectations 3,700K, with the prior revised, where else, higher to 3,732K from 3,714K. Importantly, there was a plunge in all persons claiming UI benefits in all programs: down by 245K in the week ended March 19. Altogether nothing special about this update, which refuses to take out recent lows of 375,000.